Law Commons^™

Brief Of Prof. Steven L. Schwarcz As Amicus Curiae, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Bank Regulation And Securitization: How The Law Improved Transmission Lines Between Real Estate And Banking Crises, Erik F. Gerding

Publications

This essay examines how securitization served as a new coupling rod joining cycles in real estate and banking markets and created a new pathway for financial contagion in the “subprime” financial crisis. Legal changes promoted the growth of securitization and improved this crisis transmission line. The essay examines the history of legislative and regulatory changes that facilitated bank participation in the markets for mortgage-backed securities. The essay then explains how securitization failed to mitigate the credit, liquidity, and interest rate risk associated with real estate when losses in residential markets became correlated nationwide. It then discusses how regulation contributed to …

Understanding Financial Derivatives, Timothy E. Lynch

Faculty Works

Derivatives are commonly defined as some variation of the following: a financial instrument whose value is derived from the performance of a secondary source such as an underlying bond, commodity or index. But this definition is both over-inclusive and under-inclusive. Thus, not surprisingly, derivatives are largely misunderstood, including by many policy makers, regulators and legal analysts. It is important for interested parties such as policy makers to understand derivatives, because the types and uses of derivatives have exploded in the last few decades, and because these financial instruments can provide both social benefits and cause social harms. This Article presents …

A Federalist Blessing In Disguise: From National Inaction To Local Action On Underwater Mortgages, Robert C. Hockett, John Vlahoplus

Cornell Law Faculty Publications

While it is widely recognized that the mortgage debt overhang left by the housing price bubble and bust continues to operate as the principal drag upon U.S. macroeconomic recovery, few seem to appreciate just how locally concentrated the problem is. This paper takes the measure of the national mortgage debt overhang problem as a cluster of local problems warranting local action. It then elaborates on one form of such action that the localized nature of the ongoing mortgage crisis justifies - use of municipal eminent domain authority to purchase underwater loans, then modify them in a manner that benefits debtors, …

Paying Paul And Robbing No One: An Eminent Domain Solution For Underwater Mortgage Debt, Robert C. Hockett

Cornell Law Faculty Publications

In the view of many analysts, the best way to assist “underwater” homeowners — those who owe more on their mortgages than their houses are worth — is to reduce the principal on their home loans. Yet in the case of privately securitized mortgages, such write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution, this study suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, …

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

Shadow Banking, Financial Markets, And The Real Estate Sector, Steven L. Schwarcz

Faculty Scholarship

This is a relatively brief “firestarter” talk prepared by the author for the World Economic Forum’s Industry Partnership Strategists Meeting 2012 (held on October 3, 2012) on transformation of the real estate sector in light of ongoing shifts in the financial markets and broader global trends.

The Roberta Mitchell Lecture: Structuring Responsibility In Securitization Transactions, Steven L. Schwarcz

Faculty Scholarship

In this Lecture, Professor Schwarcz examines how complex securitization transactions may have created a “protection gap,” the conundrum that transaction parties may be unable to purchase or might not want to pay the price for full protection. As a result, they sometimes choose or are forced to assume the good faith of the other parties to the transaction and the consistency and completeness of protections provided in the transaction documents.

In-House Counsel’S Role In The Structuring Of Mortgage-Backed Securities, Steven L. Schwarcz, Shaun Barnes, Kathleen G. Cully

Faculty Scholarship

The authors introduce the financial crisis and the role played by mortgage-backed securities. Then describe the controversy at issue: whether, in order to own and enforce the mortgage loans backing those securities, a special-purpose vehicle “purchasing” mortgage loans must take physical delivery of the notes and security instruments in the precise manner specified by the sale agreement. Focusing on this controversy, the authors analyze (i) the extent, if any, that the controversy has merit; (ii) whether in-house counsel should have anticipated the controversy; and (iii) what, if anything, in-house counsel could have done to avert or, after it arose, to …

Gambling By Another Name; The Challenge Of Purely Speculative Derivatives, Timothy E. Lynch

Faculty Works

Derivatives contracts can be used to hedge pre-existing risks, but they can also be used to speculate. This Article focuses on derivatives contracts in which both counterparties are speculators. These “purely speculative derivatives (PSD) contracts” have become increasingly common over the last several years and have notably resulted in the transfer of many tens of billions of dollars from institutions that had invested in the US subprime housing market to a handful of speculators who foresaw the market’s collapse, as well as many billions of dollars in fees to PSD brokers.

PSD contracts are problematic. PSD contracts are less-than-zero-sum transactions …

Derivatives: A Twenty-First Century Understanding, Timothy E. Lynch

Faculty Works

Derivatives are commonly defined as some variation of the following: a financial instrument whose value is derived from the performance of a secondary source such as an underlying bond, commodity or index. But this definition is both over-inclusive and under-inclusive. Thus, not surprisingly, derivatives are largely misunderstood, including by many policy makers, regulators and legal analysts. It is important for interested parties such as policy makers to understand derivatives, because the types and uses of derivatives have exploded in the last few decades, and because these financial instruments can provide both social benefits and cause social harms. This Article presents …

Chapman Dialogue And Law Review Symposium Keynote Address: Ex Ante Versus Ex Post Approaches To Financial Regulation, Steven L. Schwarcz

Faculty Scholarship

Ideal financial regulation would work ex ante, to prevent financial failures. Once a failure occurs, there may already be economic damage, and it may be difficult to stop the failure from spreading and becoming systemic. The reality, though, is that preventing financial failures should be only one role for regulators. Even an optimal prophylactic regulatory regime cannot anticipate and prevent every failure. This paper, which formed my Chapman Dialogue Address at Chapman University School of Law and the keynote speech at Chapman Law Review’s 2011 Symposium on the Future of Financial Regulation, attempts to contrast fundamental differences between ex ante …

Keynote Address: A Regulatory Framework For Managing Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This accessible analysis of systemic risk regulation was delivered as the keynote speech at an October 20, 2011 European Central Bank conference on regulation of financial services. Many regulatory responses, like the Dodd-Frank Act in the United States, consist largely of politically motivated reactions to the financial crisis, looking for villains (whether or not they exist). To be most effective, however, the regulation must be situated within a more analytical framework. In this speech, I attempt to build that framework, showing that preventive regulation is insufficient and that regulation also must be designed to limit the transmission of systemic risk …

A Fixer-Upper For Finance, Robert C. Hockett

Cornell Law Faculty Publications

Three facts bear notice in connection with our current financial troubles. The first is that the First World War, before the Second began, was known as "the Great War." The second is that the global Depression that struck between those two wars, which for now we can still label "Great," commenced with the burst of a multiyear real estate price bubble prior to the 1929 stock market crash. The third is that the U.S. accordingly addressed that depression through mutually reinforcing new regimes not only of financial regulation, but also of home mortgage finance - the very reforms that brought …

The ‘Principles’ Paradox, Steven L. Schwarcz

Faculty Scholarship

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of …

Keynote Address: The Case For A Market Liquidity Provider Of Last Resort, Steven L. Schwarcz

Faculty Scholarship

This short paper, prepared as a keynote address, explains why the credit crunch is fundamentally a story about financial markets, not banks. Its cause was a collapse of securitization and other debt markets, which have become major sources of financing for consumers and companies. Deprived of this financing, consumers have had difficulty purchasing homes and automobiles, and companies have had difficulty purchasing inventory and making capital investments, causing the real economy to shrink. This paper examines how these financial markets should be protected. Although already subject to many prescriptive regulatory protections, these markets evolve faster than regulation can adapt. The …

The Us Subprime Mbs Crisis: New Legislative Agenda And Potential Ramifications For Foreign Jurisdictions, Yuliya Guseva

Cornell Law School Inter-University Graduate Student Conference Papers

The recent US liquidity crisis, triggered by the failure of mortgage-related securities, produced long-lasting ramifications inside and outside of the US. International financial indicators and the housing markets demonstrate that the mortgage-related liquidity problems keep reverberating throughout the US and the global economy. In the US, even such giants as Freddie Mac and Fannie Mae, which were expected to inject market liquidity, have declared considerable losses from subprime MBS. The ongoing crisis provided a fertile ground for a number of publications and research. However, a range of fundamental issues regarding legislative responses to the US MBS crisis and its international …